FEMA Compliance Checklist for Startups

Ankita Tiwari

21 Feb, 2023

The Foreign Exchange Management Act, 1999 (FEMA) is the mechanism for economic growth and development in various sectors. The sole purpose of FEMA is to promote foreign trade, and balance of payments (BOP) and maintain the foreign exchange market in India. All major investments in India are possible only by following the procedures laid down in the FEMA. FEMA also provides for various compliances that have to be done for investment to flow in India. In this blog, we will discuss FEMA Compliance Checklist.

FEMA Compliance Checklist as per the provisions of FEMA/RBI

• Annual Return on Foreign Liabilities & Assets (FLA Return)
  This return is required to be filed by every Indian Resident company that has received FDI or Overseas Direct Investment (ODI) in any of the previous years including the current year. It is filed by a company that holds foreign assets or liabilities in its financial statements^[1] as of 31^st March. In case an Indian company doesn’t have any outstanding investment regarding FDI and/or ODI on the end of the reporting year, then the company is not required to file an FLA Return. However, if the Indian Company hasn’t received any fresh FDI and/or ODI in the latest year but has an outstanding FDI and/or ODI then it has to submit the FLA Return every year on or before 15^th July.
• Annual Performance Report (APR)
  An Indian Party or a Resident Individual who engages in an ODI has to file an APR under Form ODI Part II to the Authorised Dealer (AD) Bank in respect of each Joint Venture/Wholly Owned Subsidiary outside India. This APR has to be filed every year on or before the 31^st of December. An APR shall be certified by a statutory auditor of the Indian Party. However, such certification is not mandatory in the case of resident individuals and a self-certification can be accepted.
• External Commercial Borrowings (ECB) Return
  All borrowers are required to report details of their ECB transactions to the RBI on a monthly basis through an AD Category-I bank in the form of an ECB 2 Return. The revised ECB 2 Return discloses the hedging details in two categories-financial and natural and requires disclosure of the following data:
  1. Outstanding principal ECB amount and the currency
  2. Notional value & percentage of outstanding ECB amount of financial hedge(s) as well as a natural hedge; and
  3. Annualized percentage cost of the financial hedge(s) for ECB.
• Single Master Form (SMF)
  SMF was introduced w.e.f 30.06.2018. This form is the combination of all reporting requirements for FDI in India irrespective of the instrument via which foreign investment is made and it subsumes Forms such as FC-GRP, FC-TRS, LLP-I, LLP-II, CN, ESOP, DI, and DRR into one single Form. There are different due dates for filing forms so subsumed under this master form. The Different due dates are:
  1. FDI report in Form FC-GPR under SMF has to be filed within 30 days after the allotment.
  2. FDI Report under FC-TRS under SMF has to be filed within 60 days of the transfer of capital instruments or receipts or remittance of funds, whichever is earlier.
  3. Form LLP-I and LLP-II has to be filed for FDI reporting and transfer of capital contribution or profit share in LLPs, respectively.
  4. Form CN is to report the issue or transfer of Convertible Notes (CN) and it has to be filed within 60 days of such issue/transfer.
• Advance Reporting Form (ARF)
  An Indian company that receives investment from outside India for the issue of shares or other eligible securities under the FDI Scheme is required to file this report not later than 30 days from the date of receipt in ARF. This report contains amount details of consideration to the concerned Regional Office of the RBI through its AD Category-I bank.
• Form FC-GPR
  Report under this form is filed when a bonus or right shares are issued to persons resident outside India directly or by amalgamation or merger with an existing Indian company or for the issue of shares on conversion of ECB or import of capital goods by units in SEZs, etc. Form FC-GPR has to be filed not more than 30 days from the date of issue of shares.
• Form FC-TRS
  Form FC-TRS provides a report of the transfer of shares & other eligible securities between residents & non-residents and vice-versa. This Form should be submitted to AD Category-I Bank within 60 days from the receipt date of the amount of consideration. The burden of submitting this Form within the prescribed time frame is on the transferor or transferee resident in India.
• Form ODI
  This form is filed in cases of ODI in Joint Ventures and Wholly Owned Subsidiaries by the Indian Party or a resident individual making an overseas investment. The share certificates or any other documentary evidence of investment in the foreign Joint Venture or Wholly Owned Subsidiary should be submitted to the designated AD within 6 months from the date of receipt. However, in case of disinvestment, sale proceeds of shares/securities shall be reinstated back to India immediately on receipt but not more than 90 days from the date of sale of the shares or securities & documentary effect shall be submitted to RBI through designated AD.

FEMA Compliance Checklist from FDI perspective

Following are the FEMA Compliance Checklist from FDI Perspective

What is the FEMA Compliance Checklist Relating To FDI Under Automatic Route?

• An investor seeking to make funding via FDI must first examine whether he is eligible or not.
• The investor must enquire whether the total overseas investment/FDI is within the threshold limit prescribed for that sector and that it does not fall under forbidden sectors.
• The investor must ensure that any bonus/right issue has not resulted in foreign direct investment beyond the threshold limit prescribed for the sector.
• The investor also has to determine whether the firm has complied with the issuance of shares if any in consonance with the pre-operative or pre-incorporation expenses.
• The investor has to ensure that the directions are fulfilled while computing overall overseas investment or not.

What is the FEMA Compliance Checklist Relating To FDI Under Government Approval Route?

• It is necessary to determine whether there is any share transaction of any sort from a resident to a non-resident who seeks Government authentication.
• Determination of whether prior consent of the FIBB is availed for FDI surpassing the prescribed threshold limit for that sector or not.

What is the FEMA compliance Checklist relating to the establishment of a branch /project office/ liaison in India?

• It is necessary to determine whether the firm is carrying out any task which can be considered to be having a business place in India as per the Companies Act, 2013 & also if the compliance under CA, 2013 & FEMA has duly complied.

What is the FEMA compliance checklist for Direct Investment Taking Place Outside India Under Automatic Route?

• In cases of Investment via swapping of shares, the investor has to make sure that prior approval of the Government was taken as it is a mandate for making Investment via swapping of shares.
• In cases of Alternative Investment Funds (AIFs)/ Domestic Venture Capital Funds, it is necessary to determine if it is registered with SEBI and has invested in equity & equity-based instruments of off-shore venture capital undertakings. Such type of investment is maxed out at USD 500 million.
• It has to be ensured that obligations like the Annual Performance Report and reporting of remittances of the Indian party have been duly met.

Important features of the FEMA Compliance Checklist

• FEMA shall not apply to Indian nationals residing in overseas nations. It has to be ensured that the investor is not an Indian national residing in a foreign country. There is a standardized technique of determining an Indian citizen’s residence prescribed under the Indian Income Tax Act of 1961. Under the technique, the number of days spent by an individual in India is the basis for ascertaining if the investor is a resident or not. This technique is also used to ascertain the residential status of an office, a branch, or an agency that can be deemed as a person.
• FEMA confers the federal government the right to impose restrictions on payments obtained from India, payments made to people residing outside India, and foreign security arrangements while also administering them.

Conclusion

FEMA increases the transparency of cross-border trade and improves foreign investment. FEMA filing is important from the global trading perspective and ever-evolving trading practices. As the penalties under FEMA are quite rigorous, it becomes important to keep an eye on different fundamental thresholds relating to different sectors and investments. To ensure a startup does not breach or skip any compliance, it must refer to the FEMA Compliance checklist discussed above before it begins foreign funding.

Also Read: FEMA/ RBI Compliances Checklist: Foreign Direct Investment